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Forex: Big Week Ahead for the Dollar

DailyFX Fundamentals 12-09-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

• Big Week Ahead for the Dollar
• Pound Rallies after Stronger Trade Data
• MoF Comments Weighs on Yen

US Dollar

The end of the year is approaching and unless we get some interesting price action next week, we may really be stuck in range bound modes for the remainder of the year. We have faith that given the tremendous amount of data on the economic calendar in the week ahead, the odds are certainly in favor of some breakout move in the dollar. Normally, the Fed meeting or the TIC data alone can move markets, but to have the Fed meeting, retail sales, the trade balance, CPI, industrial production, Philly Fed and the Treasury International Capital flow report released all in one week, we would have to see an extreme amount of demand from both bulls and bears for the EUR/USD to remain in its current ranges. Judging from the market forecasts, it looks as if the market expects the data to be dollar bullish in the first 3 days of the week and possibly dollar bearish data in the second half of the week. Of course, these are simply the market’s average expectations, which day traders hope to be different from the actual results, otherwise it would not provide as interesting trading opportunities as they would be hoping for. Looking beyond the FX markets, gold is now behaving in a very similar way that the dollar did for most this past year – which is to trade in a one way uptrend. With prices at a dizzying high above $530 an ounce, traders are scratching their heads about what could be spurring the rise in the yellow metal. Aside from strong demand in general, it is becoming increasing clear that traders are also worried that inflation may roar its ugly head again even though economists are calling for consumer prices to fall for the first time in five months – we’ll see who is right.

Euro

After yesterday’s strong gains, the Euro ended the day virtually unchanged.
Most of the economic data released this morning was bearish for the Euro, but the earlier dip in the European trading session was erased throughout the US session. The German current account and trade surpluses both fell more than expected as a result of a sharp rise in import prices. By the same token, French industrial production tumbled 2.5 percent compared to the market’s expectations for a 0.2 percent rise. Manufacturing production also saw a similar tumble. The only piece of mildly positive data was the confirmation of small 0.3 percent growth in Italy during the third quarter. There was also an upward revision to private consumption during the same period. Based on the recent data that we have seen lately, it seems that Germany and France are really lagging in growth while growth in countries like Italy and Spain are really accelerating. The shift in growth should be part of the reason why the ECB is being cautious with rate hikes. Although a follow-up rate hike is expected sometime next year, the central bank is cautiously managing inflation versus market expectations. In the week ahead, the Eurozone calendar is just as busy as the US calendar with a bunch of trade as well as inflation reports due for release. To top that off, we are also expecting both the ZEW and IFO surveys.

British Pound

The British pound climbed higher today against the dollar thanks to a better than expected trade balance report. For the month of October, the trade deficit shrank from GBP 5.6 billion to GBP 4.5 billion as the oil balance moved back into a surplus. Economic data has been very mixed these days, which highlights the difficulty the Bank of England must be facing in determining monetary policy as they weigh inflation expectations with wage growth. According to the Confederation of British Industry (CBI), consumer spending in the year ahead is expected to be constrained by high energy costs and consumers’ unwillingness to take on even more debt given the slowdown in the housing market. The CBI warned the BoE to be ready to raise rates next year if needed. Meanwhile the UK’s Nationwide Building Society warned that even if house prices continue to rise next year, the gains will be modest as the high level of personal indebtness prevents buyers from being able to afford new homes. They predicted house prices to either remain unchanged or to rise 3 percent at best. They also expect the central bank to cut rates again next year to spur demand.

Japanese Yen

The Japanese Yen gave back some of yesterday’s gains as the Japanese economy grew slower than expected in the third quarter. Initially expected to grow by 0.6 percent, the Japanese economy actually grew by 0.2 percent due to a fall in private inventories. Despite the fall though, analysts are saying that upward revisions in other parts of the report such as capital expenditure and consumer spending still gives hope that Japan’s recovery may continue. Meanwhile Japanese officials continue to be relatively comfortable with the current movement in the Yen. MoF’s Watanabe was on the wires last night talking specifically about how current EURJPY movements are reflective of fundamentals. Taking a look at the price action in EURJPY, they must be fairly comfortable with the Euro’s 6 percent rise against the Yen over the past 3 months or 3.8 percent rise to all time highs over the past month. As we have previously mentioned, Japan’s export dependent economy benefits significantly from a weak currency and we are sure that the country’s monetary policy specialists are fully aware of this. Furthermore, if the recent move in the Yen was to the upside, we know that nearly all of the government officials will be kicking and screaming for some sort of intervention.

 

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